Calmer sentiment (Daily analysis 10.10.2018)

The main currency pair is still under pressure, although the EUR/USD pair returned to around 1,1500. Gradual pound increases based on unconfirmed information. The zloty pared part of the losses. The EUR/PLN exchange rate is quoted close to the 4.31 boundary, and the USD/PLN pair is testing around 3.75 PLN.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• A lack of macro data may noticeably impact the analyzed currency pairs.

Sentiment slightly calmed down

Yesterday afternoon was negative for the US currency. Neutral sentiment on the US shares and the lack of pressure on the growth of yields in the US Treasury allowed improvement of sentiment also in Europe. This had a positive impact on the valuation of Italian treasury bonds. Today, trading on the country's debt instruments is calmer and 10-year Treasury bonds are quoted in the range of 3.50-3.60%. Does this mean that the situation has stabilized?

Above all, it is worth noting that none of the recent problems have disappeared. Rome continues to adopt a confrontational attitude towards Brussels, both in economic and financial terms. Moody's and S&P rating reviews planned for the end of the month remain a serious threat.

Statements made by Italian party leaders do not suggest any easing of attitude, and sometimes even seem to provoke the market. Matteo Salvini, the League Deputy Prime Minister, quoted by Bloomberg, said that he was "absolutely certain" that the spread between Italian and German 10-year Treasury bonds would remain below 400 basis points (4 percentage points).

At this point, the difference in yields of both instruments is about 300 basis points (3%). This is already a failure because before the formation of the coalition ranged from 110 to 150 basis points. Suggestions that it is impossible to reach 400 basis points show the irresponsibility of the current administration and ignorance of the twofold increase in the cost of issuing new debt over a period of just 6 months.

Luigi Di Maio, the second Deputy Prime Minister but from the 5 Star Movement, also made a speech in a similar tone. He said that "too many people from the Italian establishment support the spread to 400 basis points because reaching that level is a way to terrorize citizens. Our goal, however, is not the spread, but the citizens,” reported by Bloomberg referring to Di Maio's statement on RAI radio.

It is hard to say whether the often mentioned spread of 400 basis points is a "pain threshold" for the Italian administration to approach budgetary issues in a more constructive way. However, the frequent raising of this level may turn out to be a self-fulfilling forecast, especially as the negative opinion of the European Commission on the Italian budget and the cut in the rating is an ideal pretext to demand higher yields for granting loans to Italy.

Fading support for the pound

Over the last few days, the British media have been full of remarks on the prospect of Britain remaining in the customs union (no customs duties between its members and a common customs policy abroad) for several years to come. Such suggestions are made by representatives of Theresa May's government. Unofficially, officers from the Republic of Ireland also support such a solution. This would prevent, among other things, the creation of a physical border in Ireland.

That could be good news for the UK, which would have more time to prepare for its own trade policy and, at the same time, postpone the border issue between Northern Ireland (part of the UK) and the Republic of Ireland for years to come. The problem, however, may be that Brussels is likely to be reluctant to accept such a solution, even if it receives broad support in the UK House of Commons (e.g. some labourists will vote in favour of it). Recent increases in GBP may, therefore, be a little exaggerated and the culmination of fear of a hard Brexit may quickly return.

Stabilisation returned to the zloty

Yesterday, we pointed out the accumulated threats to the zloty. Shortly afterwards, however, sentiment on the broader market improved and the Polish currency quickly pared the last losses. This shows that the Polish zloty may be more resistant to external threats than the quotations since the beginning of the week have shown.

As a result, the baseline scenario seems to be a return to relatively limited volatility (slightly above the 4.30 limit). Only a significant increase in fear of Italy (10 year Treasury bonds reaching the 4.00% level) or stronger declines on the US stock exchange combined with a decrease in EUR/USD to the level of 1.1400 is a high-risk scenario for the zloty. Without a strong deterioration of the external environment, a more pronounced weakening of the zloty will be surprising.